Class 4 Slides Flashcards
1
Q
What are the consequences of earnings restatements?
A
- Both decreases in expected future earnings and increases in a firm’s cost of equity capital.
- Reputational penalties to managers of manipulating earnings (they are likely to lose their jobs and find it difficult to find comparable work elsewhere)
2
Q
What does the realization principle state?
A
Record revenue when the earnings process is complete or virtually complete AND there is reasonable certainty as to the collectability of the asset to be received (e.g., cash)
